Leighton: someone must pay

Given the collective responsibility for the mess that
Leighton Holdings
now finds itself in, it’s probably time for someone to fall on his sword.

Leighton suffered its ­biggest one-day fall in two years ­yesterday, in its first day of trade since revealing it would post a $427 million loss instead of a $480 million profit this year, and since it launched a deeply discounted $757 million capital raising to repair its balance sheet.

From the outside it looks like the board wasn’t doing its job. And the buck stops with them. But it’s a little bit more complicated than that.

Former chief executive
Wal King’s
increasingly autocratic style was ­difficult to work with.

But a difficult chief executive is no excuse for a board – and more particularly a chairman – not to act.

In the end, the inaction contributed to this week’s near $ 1 billion reversal of profitability relating to write-downs on two Australian projects and increased impairment charges at its troubled Middle East ­joint venture.

King would have been the best candidate for the sword, but it is too late for that.

The industry stalwart had to be dragged kicking and screaming three months ago from the chief executive post he had held for 23 years, taking with him millions in bonuses and bathing in his own reflected glory.

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Even after the worse than expected news from Leighton this week, King showed a good deal of hubris yesterday, fronting up at a think-tank function to warn that the government’s NBN Co faced the risk of massive cost blowouts.

The next scapepgoat in line is David Mortimer, who has been chairman of Leighton for four years, and on the board for 14 years, and who allowed the so-called “cult of Wal" to rage unabated within the engineering and construction giant.

To be fair to Mortimer, the “cult of Wal" was in full swing before he took the reins, and getting rid of one of the most revered chief executives in ­Australia’s corporate history was pretty difficult before anyone knew the extent of problems inside Leighton.

And taking on King was never an easy task.

Mortimer’s immediate predecessor, John Morschel, lasted in the chair less than two years because he was considered “too hands on" and is understood to have disliked the “Wal’s way or the highway" attitude at Leighton.

And to be fair to King, the “cult of Wal" had worked pretty well for shareholders, too – until now.

During his reign he oversaw the growth of Leighton’s market capitalisation from $100 million to $9.7 billion and profits from about $7 million to $612 million.

While King took out more than $100 million over his years at Leighton, plenty of shareholders got rich along the way.

With King gone, there is a new attitude of openness and disclosure at Leighton under new chief executive
David Stewart
. The company moved quickly to assess its operations and inform the market, although some fear Leighton’s troubles are not over, particularly in the Middle East.

Even though Mortimer did take the difficult step of removing King in the end, someone should take the blame for the company’s first full-year loss in 20 years.

And certainly there is a growing belief in the market that that someone should be Mortimer.

After all, the fact that Woolworths – after years of market darling ­status – has found itself in the not-so-hot camp, probably helped by O’Brien’s ascension to the chief executive role. While outgoing chief
Michael ­Luscombe
had planned to stick around in the top job for only five years, the view is that if things had been going better, he would not be leaving so soon.

But it’s been hard for him to compete, at least on a sentiment level, with the turnaround story at Coles that’s been gaining traction since his biggest rival was taken over by ­
Wesfarmers
in 2007.

The market has been lapping up the Coles story, and not without reason. Under the leadership of Coles boss
Ian McLeod
, Coles started to enjoy superior same-store sales growth, and improvements in earnings before interest and tax (EBIT).

Woolworths unveils its third-quarter sales on Monday and Wesfarmers does so on Wednesday.

Woolworths is likely to produce substantially slower like-for-like third-quarter sales growth than Coles, with RBS analysts picking a 5.1 per cent gain (Easter-adjusted) from Woolworths compared with an 8.2 per cent gain from Coles.

But the higher growth is coming off a much lower base. Coles may now be the market darling, but its returns in the three-plus years it has been under new ownership still pale in comparison with Woolworths.

During that period, from 2007 to 2010, Woolworths’ food and liquor sales have risen 24.3 per cent, compared with Coles at 16.1 per cent, and its EBIT has jumped by 55.8 per cent, about double the increase from Coles of 25.1 per cent.

On a return on equity basis, the outperformance of Woolworths against Coles’s owner, Wesfarmers, is even more marked.

In 2007, the Woolworths group’s return on average equity was 27.8 per cent and in full-year 2010 the figure was 28.1 per cent. By comparison, Wesfarmers’ return on average equity has slumped during the same period, from 25.1 per cent to 6.4 per cent.

This is, of course, because of the $22 billion boom-time purchase price Wesfarmers paid to beat off a rival private equity bid for the underperforming Coles supermarket chain.

It is true there are ­obstacles facing Woolworths in maintaining its price leadership in the $80 billion grocery market.

The retailer has achieved these targets for the past 11 years, but profits this year are expected to grow by 5 per cent to 8 per cent, weighed down by lacklustre consumer spending and price deflation in food and general merchandise, and increased competition from Coles.

Although Coles is gaining ground on Woolworths, it has a long way to go before it can be considered equal.